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  • Drought Watch: Bankruptcy in Agricultural Sector on the Increase

Drought watch: Bankruptcy in Agricultural Sector on the Increase

25 February 2016

According to BDO South Africa it is expected that the number of South African companies filing for bankruptcy during the first quarter of this year will increase by 53% from 119 to 182, most of these being in the agricultural sector.

The recent drought throughout South Africa has had, and will continue to have, a dramatically detrimental effect on South Africa’s agricultural production. This is according to Werner Gerber, an Audit Manager at BDO South Africa. “We might very well be at the brink of the next big recession - if not already in it,” says Gerber.

According to the Economic Review of the South African Agriculture 2014/15, farming debt has increased from R75Bn to almost R126Bn over the last five years.

In an average year South Africa will typically record a 2 million tonne maize surplus, generating about R6bn in export revenue. “However, due to the harsh drought South Africa will need to import 770 000 tonnes of maize at a cost of R2.2bn. This is only one of many examples of the drought’s impact on our already struggling economy,” says Gerber.

Source: Economic Review of the South African Agriculture 2014/15

“Recently the prime lending rate increased to 10.25% and the country’s credit ratings is at an all-time low, meaning it is becoming more expensive to obtain funding and service debt. Taking this all into account - along with the increasing inflation rate - the future for South African farmers is looking very bleak.”

Gerber advises that a possible solution for farmers might be business rescue proceedings tailored specifically for the agriculture sector.

“In American Football there is a term called a ‘Hail Mary Pass’. The Oxford dictionary describes it as being ‘a long, typically unsuccessful pass made in an attempt to score late in the game and consequently winning it’. This is exactly what business rescue is - it is a last resort to save a company.”

According to Alex Eliott, a business rescue expert, one of the main reasons for the failure of business rescue proceedings is the lack of experienced, skilled company turnaround strategists in the country. “Business rescue experts assisting farmers need to have an in-depth knowledge of the agricultural sector – both the financial and non-financial aspects,” says Gerber.

“The current drought and the consequent high number of farmers expected to go bankrupt has opened up a whole new market for financial advisory firms in the form of business rescue practitioners specialising in agriculture. To ensure that business rescue plans are successful, practitioners will need to have a good knowledge of the sector, otherwise bankrupt farmers will just become a new scary statistic.”

A business rescue expert servicing the agricultural sector needs to know:

  • How the different seasonal cycles work.

    These will determine when funding is needed and when the necessary cash flow should be available to pay debt.

  • Which Act is applicable and when.

    Different Acts are applicable to different farms. For instance The Agriculture Produce Standards Act will be more applicable to farms exporting produce than farms producing for South African use only.

  • How to improve cash flow through the diversification of cultivars.

    Different cultivars of the same fruit may differ in:

    1. Life cycles - from planting to maturity to harvest. The shorter this period, the quicker the farm will be able to generate cash flow.
    2. Different harvesting times. If we take citrus as an example: Clementines can be harvested in May while something like Tambor will normally be harvested in September. Using the correct methods and creating the ideal environment it could be possible to have both these cultivars on one farm. Consequently the cash inflow period will increase.
  • How to account for the different classes of biological assets

    The classification of biological assets between non-current and current assets might have a significant influence on the financial position of a company. A stronger financial position will lead to credit suppliers being more lenient towards the company.

  • How environmental developments will influence the present and future economic situation of farms.

    If we think about environmental developments we tend to immediately think about the climate and we forget about environmental factors such as disease and pests. Some of these include, sirex (wood wasps), fruit flies, melanose, potassium deficiencies and mold. The business rescue specialist should know the financial implications of a disease or pest on a farming operation.

  • The different carrying norms for different produce

    Different cultivars have different carrying abilities. It is very important to know what the norm per cultivar is for better budgeting purposes. Better budgeting will lead to better cash management.

  • What the B-BBEE requirements are for agricultural exports

    The practitioner should also be aware of the B-BBEE requirements for doing business offshore, better ratings could lead to more income streams.

  • What the requirements are for government grant applications and how to account for this

    Farms may apply for government grants, especially for socio-economic development of farms and the laborers working on farms.